A rookie trader’s rapid 84% wipeout shows the depth of China’s gold bust

From hedge funds to homemakers, the leverage-loving Chinese traders behind gold’s record rally are now nursing big losses after one of the fastest market reversals in years.

For Merry Chen, a 42-year-old homemaker in Hangzhou, the foray into precious metals lasted less than a week. With no prior experience in derivatives, Chen opened a futures account last Monday on the advice of friends. The initial results were promising: she gained 60% on her 1 million yuan ($144,000) investment in just 48 hours. But Friday’s sharp drop wiped out those gains and triggered a forced liquidation, leaving her with a 750,000 yuan loss, down 84% from the peak.

“I never imagined it could be this intense,” said Chen, who plans to close her account. “It felt like a trip to a casino in Macau.”

Chen’s losses are emblematic of speculators who had piled into precious metals before the Friday crash triggered widespread losses and forced liquidations of leveraged futures positions. While part of the trigger was the nomination of Kevin Warsh to lead the US Federal

Reserve, which sent the dollar higher, many had long warned the metals markets were too overstretched.

Spot gold fell as much as 10% on Monday, and is down almost a fifth from an all-time high reached in the last-but-one session. Silver plunged as much as 16%, following a record intraday loss in the previous session.

The sharp reversal gave trendfollowing commodity trading advisor models at Chinese quantitative hedge funds — which typically hold commodities for 3 to 20 days — scarcely any time to adjust, according to Lv Chengtao, a partner at SHQX Asset Management. That came as non-ferrous and energy futures have also retreated, he said.

As a result, many CTA managers’ net asset values would likely have been under pressure Friday and Monday, he said.
Since such CTA holdings are often spread across a wide array of commodities and their leverage is typically lower than 300%, the drawdowns since Friday have been controllable so far, sparing most of them from forced liquidations, he said.

Still, some such funds suffered drawdowns of more than 10%, according to an executive with a Shanghai-based quantitative fund, whose firm cut most of its preciousmetal futures positions last week to limit losses. He asked not be named discussing a private matter.

The decline is coming ahead of the Lunar New Year holiday, when CTAs tend to cut positions by 30%-50% to reduce risks because offshore trading continues during the week-long break, and that process of reductions has started already, according to a Shanghai-based quant fund.